Considering a 1031 Exchange? What You Need To Know For Taxes In 2024 

Property ownership has historically proven to be a solid strategy for wealth accumulation and financial stability. When managed effectively, it can offer the potential for a dependable income stream with minimal oversight requirements. However, to meet their investment goals, many investors find it necessary to recalibrate their property portfolios periodically.

The prospect of trading an existing property for one that aligns better with an investor's strategic objectives is appealing until you factor in the significant tax liability triggered by the sale. It's worth noting that the tax imposed on sale proceeds can reach up to 42.1% at the Federal level, in addition to any state income tax, if applicable.

However, a well-planned 1031 Exchange can provide a way out of this taxing predicament. This provision allows investors to divest from a property without the burden of capital gains tax or depreciation recapture tax, provided the sale proceeds are funneled back into "like-kind" investment real estate of an equal or higher value and that all IRS tax code stipulations are duly observed.

Seven Potential Benefits of a 1031 Exchange Beyond the Scope of Tax Deferral

While tax deferral is undeniably a prime attraction of a 1031 Exchange, it's not the sole potential benefit enticing property investors. This tax provision may also act as a strategic tool to "level up" your real estate investment portfolio, enabling you to strive to achieve your specific objectives.

This could mean acquiring larger properties, procuring assets in more desirable locations, investing in newer builds, potentially generating higher income, striving to mitigate risks, or attempting to meet any other personal investment milestones. Here are seven distinct ways a 1031 Exchange can be used to seek to elevate the value of your single-property investment portfolio:

 1. Transition to a potentially more advantageous property type.

The flexibility of a 1031 Exchange permits investors to diversify their portfolio across an array of property types, even extending to different ownership structures such as fractional ownership of large, income-yielding "institutional" real estate.

This could be a prudent decision if, for instance, an investor with a retail property is facing hurdles due to the surge in e-commerce and may prefer investing in residential buildings in areas with robust population growth. Similarly, a retiree seeking steady income may decide to exchange a multifamily property focused on appreciation for a different property type that yields higher cash flow.

2. Relocate your investment to a more desirable location.

The geographical location of a rental property can profoundly affect its value, cash flow, and potential for appreciation. A 1031 Exchange offers the opportunity to reinvest in properties located in areas offering more favorable conditions, such as states with lower taxes, rapidly growing markets, or more advantageous landlord-tenant laws.

3. Augment the capital re-invested in the next property.

By using a 1031 Exchange, investors can reinvest the entire net proceeds from the sale of their relinquished property into a new one. This tax deferral can be regarded as an interest-free loan from the government, enabling a more substantial investment in the next property, thus potentially leading to increased cash flow and appreciation.

4. Enhance monthly income potential and possible returns.

A 1031 Exchange may serve as a powerful instrument for wealth accumulation, allowing investors to leverage the appreciated value of their property to expand their purchasing power without any tax consequences. With this enhanced buying power, investors are able to target properties with a focus on delivering not only higher but also passive income potential.

Moreover, retaining the full net proceeds from the sale facilitates the acquisition of higher-value properties. The potential to defer capital gains tax across a lifetime of real estate transactions creates a systematic path for personal wealth creation and subsequent transfer to heirs.

5. Strive to diminish the risk on the capital reinvested into real estate.

Given the high entry costs associated with real estate investing, investors often allocate a substantial portion of their net worth to one or two properties, typically within the same locality and of the same property type. Exchanging into a Delaware Statutory Trust (DST) real estate through a 1031 Exchange allows investors to spread their capital across multiple DST properties, thereby diversifying their portfolio across various property types and geographic locations.

6. Lighten tax burdens and complexities for estate beneficiaries.

Employing 1031 Exchanges to defer tax liabilities until an owner's passing can eradicate these deferred taxes for their beneficiaries, thereby amplifying the inherited value for future generations. Upon the owner's passing, the IRS wipes clean capital gains, depreciation recapture, and net investment income tax, a process known as "step-up in basis."

In "community property" states, a surviving spouse is entitled to a full step-up in basis to the fair market value of the properties. This means that the property could be sold immediately after receiving the step-up without incurring any of the aforementioned taxes.

7. Leverage the Power of Passive Investing: Simplifying Property Management with a 1031 Exchange

For seasoned real estate investors seeking to streamline their investment endeavors, the 1031 Exchange offers a golden opportunity. By utilizing this powerful tax strategy, investors can effectively reduce the time and effort spent on property management. Instead, they can seamlessly transition into passive investment options, such as top-tier DST real estate offerings curated by experienced institutional management teams. Experience the benefits of hassle-free ownership while seeking to increase your returns through the 1031 Exchange.

Navigating the Risks: Examining the Downsides of a 1031 Exchange

Yellow paper boat with a compass illustrating the new direction and challenges when navigating the risks and benefits of a 1031 exchange for tax deferral

Before diving into a 1031 Exchange, it's crucial to acknowledge the risks involved in this investment strategy. Real estate, being an illiquid asset class, requires careful evaluation to ensure its suitability for an investor's financial position and objectives. Liquidity emerges as a significant consideration, as investors need to possess sufficient liquid assets to cover unforeseen expenses, such as medical bills. However, there are mitigation strategies available, such as exploring refinancing options or acquiring suitable insurance coverage.

One notable drawback of a 1031 Exchange lies in its inherent complexity. Mishandling the process can result in substantial costs. Hence, it becomes imperative to collaborate with trustworthy 1031 Exchange companies, qualified intermediaries, proficient tax counsel, as well as experienced financial professionals and estate planning attorneys. At Perch Wealth, we prioritize working alongside our clients and their advisors, ensuring a comprehensive understanding of exchange regulations, thorough discussions on associated risks, and flawless execution of the transaction.

Determining the Suitability of a Tax-Deferred 1031 Exchange for Your Needs

Portrait of a female financial consultant advising on the suitability of a tax deferred 1031 exchange for ensuring financial stability

The utilization of a 1031 Exchange as a tax strategy has gained significant traction among investors when selling investment properties. IRS data reveals that over the course of ten years, from 2004 to 2013, a staggering $1.3 trillion worth of properties exchanged hands in more than 2.9 million transactions. The popularity of 1031 Exchanges tends to surge during robust economic periods, as property owners seize the opportunity to leverage the appreciating real estate market.

For real estate investors seeking a flexible solution that aligns with their financial and lifestyle objectives, tax-deferred exchanges offer an attractive proposition. Whether the goal is to reduce active management, enhance income, or minimize taxes for beneficiaries, the versatility of a 1031 Exchange can serve as a valuable tool for attempting to achieve successful real estate investments.

At our firm, we prioritize empowering investors with a comprehensive understanding of the benefits and risks associated with 1031 Exchange options, various locations, market conditions, and how these factors can be synergistically combined to achieve their investment goals.

If you are considering selling your investment property and wish to explore 1031 Exchange options further, we encourage you to reach out to us and speak with one of our licensed 1031 Exchange professionals. We offer complimentary consultations that can be conducted over the phone, via video conference, or in person at one of our offices.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication. 

1031 Risk Disclosure: 

Unveiling the 1031 Exchange Potential for Gold!

Unveiling the 1031 Exchange Potential for Gold!

Investors often aim to use a 1031 exchange as a strategy to postpone the payment of capital gains taxes when selling property. This approach can potentially boost the funds available for reinvestment, thereby enhancing the investor's ability to leverage their investment power. By engaging in sequential exchanges, this effect can be compounded, enabling the potential for portfolio growth. Many investors find this to be a logical approach.

This rationale has led some taxpayers in the past to push the boundaries of what types of property they could exchange, including collectibles, intellectual property, and precious metals. While gains from the sale of stocks and securities have never qualified for such exchanges, there have been cases where other types of property were eligible. Prior to the passage and implementation of the Tax Cuts and Jobs Act (TCJA), coins, artwork, and even antiques were sometimes approved for exchanges.

Nevertheless, even before the IRS tightened its criteria, certain restrictions were already in place. For instance, previous rulings by the IRS rejected attempts to exchange gold for silver, deeming them as not meeting the requirement of being "like-kind." Additionally, the exchange of gold coins for gold bullion was also disallowed.

TCJA Exclusions

Closeup of the Tax Cuts and Jobs Act documents highlighting the exclusions relevant to 1031 exchange and the associated tax benefits in property and investment planning

Following the enactment of the Tax Cuts and Jobs Act (TCJA), there were significant changes to the eligibility of assets for like-kind exchanges. Under the TCJA, the scope of like-kind exchanges was narrowed down to only include real estate. This exclusion meant that assets other than real estate, such as collectibles, intellectual property, and valuable metals, were no longer eligible for tax-deferred exchanges.

In response to the TCJA, the Internal Revenue Service (IRS) took steps to provide further clarification on the statutory limitations and parameters of like-kind exchanges. One such clarification came in the form of Regulation REG-117589-18, issued by the IRS. This regulation aimed to define and specify the types of properties that qualified as real property for the purpose of like-kind exchanges.

According to REG-117589-18, real property, for the purposes of a like-kind exchange, is defined as encompassing various elements. These elements include land, improvements made to land, unsevered crops, natural products of the land, and even the water and air space that are directly adjacent to the land. It is important to note that this definition extends to include permanent structures such as roads and bridges, which are considered integral components of the real property.

By providing this detailed definition of real property, the IRS aimed to establish clear guidelines for taxpayers and investors engaging in like-kind exchanges. These guidelines outlined the specific types of assets that would still qualify for tax-deferred treatment under the revised rules set forth by the TCJA.

How do 1031’s work?

Woman meeting with a financial advisor in office discussing the workings of a 1031 exchange and the tax benefits it can offer in property investment planning

A 1031 exchange is a valuable tool for taxpayers who own real estate and wish to optimize their investment strategy. Let's delve into how it works. Imagine you are a real estate owner with an apartment building located in one state. However, you have a desire to shift your focus to another geographical area or change the composition of your portfolio by eliminating residential assets and acquiring industrial properties instead.

In this scenario, if you decide to sell the apartment building, you will be subject to capital gains taxes. The capital gains tax is calculated based on the difference between your initial purchase price (referred to as the basis) and the current market value at which you can sell the property.

To illustrate, let's assume you purchased the apartment building for $500,000, and its current value is estimated at $1,000,000. This signifies an increase of $500,000 in value (while considering any adjustments to the basis). Depending on your income level, you could potentially face a tax bill of up to $100,000 (assuming you have owned the property for more than a year and qualify for long-term capital gains tax rates).

Now, here's where the 1031 exchange comes into play. By executing a 1031 exchange, you have the opportunity to defer the payment of capital gains taxes and reinvest the entire $500,000 profit into a new property. Instead of paying the taxes immediately, you can utilize the funds to acquire a replacement property that aligns with your investment goals. This deferral allows you to leverage the full amount of your profit for reinvestment, thereby enhancing your investment power and potential returns.

By taking advantage of a 1031 exchange, you can defer the tax liability and maintain a larger pool of funds to invest in new properties. This strategy enables you to strategically reposition your real estate portfolio and pursue investment opportunities that align with your long-term objectives.

Repeating the Exchange Transaction

Engaging in a 1031 exchange does not completely eliminate the obligation to pay capital gains tax. While the exchange allows you to defer the tax payment by reinvesting the proceeds into a replacement property, if you eventually sell that replacement property, the capital gains tax will come into play. At this point, you will not only owe tax on the gain from the sale of the replacement property but also the deferred tax from the original asset.

However, there is an intriguing aspect to consider: the potential for successive exchanges and the opportunity to continuously defer the tax liability. By repeating the 1031 exchange process with subsequent property sales, you can continually defer the capital gains tax and reinvest the funds into new replacement properties. This strategy can potentially enhance your investment power and facilitate portfolio growth over time.

Another noteworthy aspect to explore is the possibility of completely avoiding capital gains tax by holding onto the investment until you pass away and bequeathing it to your heir(s). In this scenario, when the property is inherited, the heir(s) will receive it at a stepped-up value, which is determined by its fair market value at the time of your death. Consequently, the heir(s) will not be liable for any tax on the gains that accrued prior to your passing.

This stepped-up basis allows for a reset in the tax calculation, erasing the previously deferred gains. As a result, your heir(s) can potentially inherit the property without incurring any tax liability on the accumulated gains up to that point. This can be a substantial benefit for striving to preserve wealth and passing it on to the next generation.

By leveraging the strategy of successive 1031 exchanges and potentially utilizing the stepped-up basis upon inheritance, taxpayers can effectively manage their tax obligations and attempt to maximize the benefits of deferring capital gains tax. It is essential to consult with tax professionals and estate planning experts to ensure proper execution and compliance with applicable tax laws and regulations.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication. 

1031 Risk Disclosure: 

Why the Conventional 60/40 Portfolio May Be Largely Out-of-Date

The traditional 60/40 portfolio, which has been the mainstay investment strategy for decades, may no longer be effective due to the probable underperformance of both its component parts for years to come. The 60/40 portfolio involves investing 60% of your money in stocks and 40% in bonds, and it is designed to attempt to capture capital appreciation through equities while mitigating risk through asset diversification into fixed income.

However, experts are now saying that this approach may no longer be effective, as both stocks and bonds may not make as much money in the future as they have in the past. This view has only been amplified by recent economic events, including high inflation and the possibility of stagflation, which are causing financial experts to reconsider their approach to investing.

In fact, these events have prompted some experts to predict a lost decade for the 60/40 portfolio, meaning that this investment strategy may not yield significant returns for investors over the next ten years.

In response to these concerns, financial advisors are being encouraged to take a different approach to managing their clients' capital. This may involve diversifying investments across different asset classes, such as real estate or commodities, in addition to stocks and bonds. Some advisors are also recommending more active management of investment portfolios, with a focus on striving to identify opportunities for growth and mitigate risk in a dynamic market environment.

60/40-portfolio-may-be-largely-out-of-date-new-investment-strategies-Connecticut-retirement-planning-DST-1031-exchanges

Overall, the traditional 60/40 portfolio may no longer be the best way to invest money, and that financial experts need to be more creative and dynamic in their approach to investing in order to help clients achieve their financial goals.

Traditional investment strategies, such as the 60/40 portfolio, are becoming increasingly obsolete in the current economic environment. Financial experts are rethinking their approach to investing, and it is becoming clear that the mix of equities and bonds that has been the mainstay investment strategy for decades is no longer as effective as it used to be. In fact, there is a rising risk of stagflation in the US and Europe, which is causing some experts to predict a lost decade for the 60/40 portfolio mix of stocks and bonds.

One of the problems with the 60/40 portfolio is that, on the equity side, geopolitical conflicts are slowing economic growth, which in turn is leading to slower earnings growth. Additionally, lower valuations as a result of higher interest rates further complicate the issue. This means that the equity portion of the portfolio is not performing as well as it has in the past.

The bond portion of the portfolio is also experiencing problems. With higher interest rates, bond prices are decreasing, and the pace of inflation means that real returns for bondholders will be lower, and in some cases negative. This means that the fixed-income part of the 60/40 portfolio is also not performing as well as it has in the past.

As a result, the traditional 60/40 portfolio is not well-equipped to perform in the current economic environment. In fact, it is down more than 10% this year, on pace for its worst performance since the 2008 financial crisis.

To address this problem, financial experts are recommending more dynamic and diverse investment strategies. This may include investing in alternative asset classes, such as real estate or commodities, or using active management techniques to identify opportunities for growth and manage risk in a more dynamic market environment. Overall, the message of the article is that the traditional 60/40 portfolio is no longer effective, and that investors and financial advisors need to be more creative and proactive in their approach to investing.

Rising Possibility of a Lost Decade for the 60/40 Portfolio

Traditional investment strategies like the 60/40 portfolio may be becoming increasingly obsolete, especially with the current economic environment. Financial experts are rethinking their approach, and it's becoming evident that the traditional mix of equities and bonds that has been the mainstay investment strategy for decades no longer performs as well as it used to. According to Goldman Sachs’ portfolio strategist Christian Mueller-Glissmann, the rising risk of stagflation in the US and Europe is raising the possibility of a lost decade for the 60/40 portfolio mix of stocks and bonds.

The Problem with the 60/40 Portfolio

There are two problems with the 60/40 portfolio. First, on the equity side of the equation, geopolitical conflicts are slowing economic growth, which in turn points to slower earnings growth. Additionally, lower valuations as a consequence of higher interest rates further complicate the issue.

Second, bondholders are also experiencing problems, with lower bond prices as a result of higher rates, while the pace of inflation means that real returns for bondholders will be lower, and in many cases negative. Therefore, the traditional 60/40 portfolio is ill-equipped to perform and is down more than 10% this year, on pace for the worst performance since the 2008 financial crisis.

The Endowment Model - A Step Ahead

The endowment fund of Yale University is a prime example of how traditional stocks and bonds are no longer adequate to produce material growth with manageable risk. This fund currently has only 5% of its portfolio allocated to stocks and 6% in mainstream bonds of any kind, while the other 89% is allocated to other alternative sectors and asset classes.

Although a single portfolio's allocation cannot be used to make broad-based predictions, the fact that this is the lowest allocation to stocks and bonds in the fund’s history is significant.

Harvard's New-Age "Alternative 60/40 Portfolio"

Harvard University's endowment serves as another example of the growing trend of investing in alternative assets. As of June 30, Harvard's endowment had an allocation of 36.4% to hedge funds, 23% to private equity, 18.9% to equities, 7.1% to real estate, and only 4.9% to bonds. As per the Harvard Management Co. President and CEO Nirmal P. "Narv" Narvekar, the university's $41.9 billion endowment returned 7.3% in "another year in which asset allocation (or risk level) played a major role in returns."

Conclusion

Traditional investment strategies are becoming increasingly obsolete, and investing in alternative assets is becoming more popular. With the traditional 60/40 portfolio's lackluster performance, investors should consider diversifying their portfolios and exploring alternative investment options. With the help of a financial advisor, investors can explore different asset classes to find a portfolio that aligns with their financial goals and risk tolerance.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

Real Estate Syndication & DST 1031 Exchanges

Delaware Statutory Trust (DST) 1031 exchanges are becoming increasingly popular among investors due to the potential advantages of real estate syndication. Real estate syndication is a key aspect of the structure of DST 1031 investments and is a significant factor in their growing popularity as an alternative investment for accredited investors.

What Exactly Is Syndication?

Syndication refers to the process of bringing together a group of investors or organizations to collectively invest in an asset that requires a large amount of capital. In the context of real estate, it means organizing a group of investors to pool their financial resources to purchase one or more properties. Investors are issued beneficial interests or shares in the property, and profits and losses are distributed according to their percentage of ownership.

This concept is particularly relevant when discussing Delaware Statutory Trusts (DSTs) because they allow for multiple investors to own a property for their 1031 exchange or cash investment, unlike traditional 1031 exchanges which typically involve a single investor.

Additionally, DSTs can have a much higher number of investors (usually up to 499) compared to other group investment structures like Tenant in commons (TICs), which have a limit of 35 investors, making them a suitable option for those looking to invest in larger and more diverse real estate assets. However, unlike regular syndications, the DST property or properties have already been acquired by the DST sponsor before being offered to 1031 exchange investors.

investment-group-real-estate-syndicatioin-DST-1031-exchange-Connecticut-retirement-planning-wealth-management

The Benefits of Syndication:

One of the major advantages of DST 1031 exchange investments for investors is that they eliminate the challenges and responsibilities of active ownership and management. In DST investments, the sponsor creates the trust and takes on the responsibilities of managing the assets and the business of the trust. These responsibilities can include:

-       Underwriting the Deal

-       Conducting due diligence on the property(ies)

-       Arranging financing

-       Creating a business plan for the property(ies)

-       Finding a property management company

-       Coordinating investor relations and potential monthly distribution checks to investors

-       Delaware Statutory Trust syndication provides investors with a passive ownership structure

In exchange for giving up active management, the passive investor of a DST 1031 property will typically receive 100% of their pro-rata portion of any potential principal pay-down from the loan on the property, thereby potentially building equity. In addition, DST 1031 properties are structured so that the investors in the DST receive 100% of their pro-rata portion of the potential rental income generated by the property's tenants.

Other Potential Benefits To DST Syndication:

Get ready to upgrade your real estate game, folks! With a syndicated Delaware Statutory Trust 1031 exchange, you'll have the chance to snag a piece of some seriously impressive, institutional grade assets.

We're talking industrial distribution centers, medical buildings, self-storage facilities, and even massive apartment communities worth $50 million or more! And the best part? With a typical minimum investment of $100,000, regular investors can get in on the action. It's like a VIP pass to a whole new level of real estate investing.

Delaware-statutory-trusts-1031-exchanges-real-estate-investors-CT

Want to spread your investment wings? Then a Delaware Statutory Trust (DST) is just what you need! With a DST, you'll have the ability to invest in multiple properties, possibly mitigating your risk and increasing your chances of success.

Plus, you'll be able to choose from a variety of asset classes, like multifamily, commercial buildings, self-storage, medical facilities, and industrial distribution centers. And, with the ability to invest in multiple geographic locations, you'll be able to diversify your portfolio like a pro! And let's not forget, portfolio diversification is a tried and true economic theory, recognized by none other than Nobel-Prize winning economist Harry Markowitz.

Just remember, diversification does not guarantee profits or protection against losses and that investors should read each DST offerings Private Placement Memorandum (PPM) paying attention to the risk factors prior to considering a DST investment.

Investing in commercial real estate can be challenging, as it requires a significant amount of experience and resources. Even for experienced investors, it can be difficult to source, inspect, underwrite, and close on large institutional properties within the timeline of a 1031 exchange.

However, with a Delaware Statutory Trust (DST) syndication, investors can work with the specialized team at Perch Wealth, a national DST expert advisory firm. They have created a platform, www.perchwealth.com, that provides investors with access to a marketplace of DSTs from more than 25 different DST sponsor companies. Additionally, they have custom DSTs available only to their clients and provide independent information on DST sponsor companies as well as full due diligence and vetting on each DST investment.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

Potential Benefits of Passive Real Estate Management in DSTs

One of the reasons that investors often like to invest in real estate is because they like the idea of passive cash flow and passive real estate management. But what many investors quickly come to realize is that almost all real estate investing is not truly passive.

For example, investors in multifamily sometimes hire a property management company, only to quickly discover that even though they might not be managing the actual tenants, they usually end up having to manage the property managers!

And for those that invest in NNN properties believing that they won’t have any management responsibilities, they can rapidly realize that if the tenant files for bankruptcy or moves out, they’ll need to find a new tenant, negotiate a new lease, manage leasing agents, etc. or in the case of many NNN properties manage the tenants rent relief requests during a pandemic such as COVID 19…

And this isn’t to say that those investors cannot handle dealing with these issues, but why should they when there is an alternative that might be better in the form of a Delaware Statutory Trust (DST)?

There are generally 3 categories of how real estate investors manage their real estate:

1)    Investors that actively and personally manage their properties themselves

2)    Investors that hire a property-management company

3)    Investors that invest in DSTs

Investors that actively manage their properties:

For those that self-manage their investment properties, they might find yourselves fielding demanding calls and emails from tenants asking them to do things like unclog their toilets, change their burnt-out lightbulbs, fix the dishwasher, repair water leaks, get rid of alleged mold, etc…, and often these requests come in during the exact time that you’d rather not be dealing with those problems, like on the weekend, the middle of the night, on a holiday or when you’re on a vacation.

And that does not include finding tenants for your properties, interviewing them, running background checks, dealing with security deposits, doing walk-throughs, collecting rents on time, keeping up with city, county, and state rent laws and regulations, and more.

Then of course, sometimes dealing with tenants that have not paid their rent, or caused damage to your property, and then having to spend time, money and effort to evict them (if the city or state has not enacted an eviction moratorium as many have done during the COVID 19 pandemic). And then repeating the process again.

real-estate-management-property-managers-passive-income-active-real-estate-operations-Hartford-CT

Investors that hire a property management company

Oftentimes, finding a property management company that can properly manage investors’ property is no easy task. Some examples include property management companies charging their clients for items that should be the responsibility of the tenant. They could also fail to effectively communicate with the  tenants, failing to pay enough attention to the client’s property because they are also managing many other properties and don’t have the requisite manpower to manage it all.

In addition, not negotiating prices and terms well enough on behalf of their owner clients when it comes to 3rd party providers such as plumbers and electricians, hiring employees that don’t adequately understand property management issues, and charging too much for their services making it financially unattractive for owners to employ them.

Investors that invest in Delaware Statutory Trusts (DSTs)

Delaware Statutory Trust investments are commonly managed by professional, institutional level, real estate companies and are often referred to as DST sponsor companies. These DST sponsor companies will often employ large, experienced, and credentialed on site property management companies. These companies oftentimes have decades of property management experience, operate in various states, and have the infrastructure necessary to potentially help manage properties efficiently and effectively.

Moreover, these property management companies have another layer of oversight by large and professional asset management companies, adding another level of accountability to DST investors and relieving investors of having to manage the property managers themselves.

Notably, because these property management companies usually manage thousands, if not tens of thousands, of units and properties, they are able to offer lower management costs while providing for a potentially higher level of professional service.

Any accredited investor (generally defined as having a net worth of over 1 million dollars excluding primary residence, or meeting certain income thresholds) that is considering investing in real estate in a passive, hands-free, way, without subjecting themselves to the numerous issues often associated with managing the property themselves, should consider investing in a DST. 

The nice thing about a DST is that, under the current IRS code, when the property is sold the investor is able to do another 1031 exchange if they so choose. This is one reason that investors are choosing DSTs over Real Estate Investment Trusts (REITs) as you are not able to utilize the 1031 exchange tax deferral solution when you sell REIT shares.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only, and should not be relied upon to make an investment decision. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

•         There is no guarantee that any strategy will be successful or achieve investment objectives;

•         Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;

•         Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;

•         Potential for foreclosure – All financed real estate investments have potential for foreclosure;

•         Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.

•         Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;

•         Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits

Deferring Taxes in QOFs, 1031 Exchanges & DSTs

Investors looking to defer, reduce or exclude capital gains have various options for investing in real estate. Understanding the differences between each investment vehicle is imperative to developing an investment strategy that will help you strive to meet your financial objectives. To help provide direction, we have outlined the tax differences in investing in a Qualified Opportunity Fund (QOF), a Delaware Statutory Trust (DST) and a 1031 exchange—three of the most common investments relied upon today.

QOFs Versus 1031 Exchanges

QOFs and 1031 exchanges are some of the best-known investment options for deferring taxes. At first glance, it seems as though the tax benefits associated with investing in a QOF are similar to those realized when reinvesting through a 1031 exchange. Notable differences, however, do exist.

• Only proceeds from the sale of real estate can be rolled into a 1031 exchange, while capital gains from other assets, including stocks, bonds and business equipment, can be reinvested into a QOF.

• QOF investors are not required to identify a replacement property within 45 days or use a qualified intermediary. Instead, they are given 180 days to reinvest the proceeds from the sale of their prior assets.

• To be eligible for a full 1031 exchange tax deferral, investors must invest the value (equity and debt) of their investment realized upon sale. When investing in a QOF, only gains must be invested.

QOFs Versus DSTs

Another popular way to potentially defer paying capital gains tax on the sale of real estate is by reinvesting the proceeds from the sale of the asset into a DST. DSTs are eligible for the same tax benefits as 1031 exchanges, which means investors can use DSTs as a vehicle for deferring capital gains tax, sometimes indefinitely.

Compared to QOFs, DSTs have similar tax benefits; however, investors should be aware of some differences between the two investment vehicles.

• Investments in QOFs are intended for ground-up and value-add real estate. DSTs are typically stabilized, cashflow-generating properties.

QOF capital gains deferred through 2026 are eligible for a partial step-up; they must be held for at least 10 years to be excluded. DST investments are not eligible for exclusion but may be deferred indefinitely. The asset basis is stepped up to fair market value at the time of the investor’s death.

• Only proceeds from real property may be reinvested in a DST, whereas the short- and long-term gains on the sale of nearly all assets can be reinvested in a QOF.

• QOF investments have strict geographic boundaries; DST investments have none.

• DSTs must identify a property or portfolio of properties before accepting investments, while QOFs have a “blind pool,” meaning that capital deployment is flexible if 90% of assets remain in a Qualified Opportunity Zone (QOZ).

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Which Investment Vehicle May Be Right For You?

QOFs, 1031 exchanges and DSTs all have their pros and cons. So, when determining which investment vehicle may be best for you, consider the following.

• How much authority do you want to have over how funds are invested? With a QOF, investors are often unaware of how their capital will be invested; however, in a 1031 exchange or DST, assets have already been identified.

• Is a step-up in basis important to your legacy planning? When an investor passes away, any investment made in a QOF will not receive a step-up in basis to market value; therefore, heirs will pay the tax consequence upon selling ownership in the QOF.

• Has the asset you are planning to sell already been depreciated? Unlike 1031 exchanges and DSTs, QOFs do not allow you to defer depreciation recapture on the underlying asset upon sale.

Understanding Risk

No matter your investment strategy, whether it is in a DST, QOF or 1031 exchange, or whether your investment is leveraged or not, risk is always involved. There is no guarantee that your goals will be met, and investors are always at risk of losing some, if not all, of their cash flow or investment.

The income stream, the depreciation schedule, the investment itself or a change in the tax code may affect an investor’s tax benefits (e.g., a change in an investor’s tax bracket resulting in immediate tax liabilities).

Furthermore, for those considering investing in a QOZ, additional risk must be considered. As newer investments, most have little or no operating statements; returns and gains aren’t generally seen until the property is sold or refinanced; liquidity is limited; valuation of assets can be difficult; and as unregistered securities, the regulatory protections of the Investment Company Act of 1940 are not available.

Additionally, QOZs require speculative development of ground-up or heavy value-add projects in economically distressed areas. Opportunistic real estate deals such as these can be riskier than investing in a potentially stable, cash-flowing asset through a DST. Moreover, investors are always required to invest pledged capital, no matter the performance of the asset.

The differences between these investment options can create uncertainty, even with a seasoned investor. Therefore, it is highly recommended that investors considering investments in real estate or alternative real estate funds speak with a qualified professional.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves the risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

Investment in Industrial Real Estate: 5 Reasons to Consider it

Industrial real estate has become one of the most profitable and popular investment types in the United States. Industrial real estate opportunities provide a wide range of excellent options that might be ideal for institutional portfolios, private investors, or family offices with varying risk appetites and tolerances. Industrial real estate provides an extensive variety of property types, such as warehouse, distribution, manufacturing, and flex space. 

Although industrial assets might not have the aesthetics and curb appeal of other types of real estate, there has been a surge in demand for industrial investments over the last few years as the sector gradually transforms in order to accommodate many high-growth industries.

What is Industrial Real Estate?

Industrial properties include the following: 

It is worth noting that the types of industrial properties in different regions or areas often vary based on the local infrastructure. For example, some areas are pretty heavy on manufacturing, and some towns and cities may have limited options for industrial investments. 

There is no doubt that automation and technology have played a massive role in industrial property development over the last few years. Also, it has become a primary expense for industrial landlords whose tenants have resorted to automation and robotics for their business activities. This innovation has made industrial real estate a very lucrative and exciting investment category.

Many experts consider industrial real estate one of the strongest and most attractive asset classes as it’s usually relatively inexpensive to own and operate. It also typically provides a more stable cash flow than other real estate sectors, like retail and office.

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Here are five reasons to consider investing in industrial real estate:

1.    High Demand

Industrial properties usually stay vacant for considerably less time than other kinds of commercial real estate, such as office space. CBRE reveals that leasing demand for industrial property, such as distribution centers, has been mainly driven by transportation and warehousing, retail, and wholesale (including e-commerce), as well as processing and manufacturing. Also, as industrial real estate plays a huge part in infrastructure, it is usually in high demand in specific areas. 

And demand for industrial properties stays high as almost every product we encounter or use has likely passed through an industrial property in one way or another. Hence, these properties are considered to be part of the logistical supply chain and thus indispensable. Due to the current popularity of e-commerce and the resultant need for larger-scale distribution and fulfillment centers, this industry has the potential to flourish in the future, resulting in the possibility of continued high-demand.

2.    Less Maintenance

Owning a commercial property comes with its fair share of expenses and overhead, such as repairs, upgrades, and renovations. These expenses will likely be necessary throughout the entire duration of your ownership and tend to become both time-consuming and costly.

However, overall, the maintenance or upgrades required are usually much less than in most other sectors. For example, many industrial properties are usually big, open areas with high, exposed ceilings and poured concrete floors, and so there is no need for items like flooring, high-end fixtures, and sound-proofing.

3.    Reasonable Vacancy Costs and Lower Vacancy Rates

One of the least attractive aspects of real estate investment is facilitating your property for the next tenant once the previous tenant moves out. This means that in the case of residential or retail tenants, landlords will likely have to pay the remaining heating bills, insurance taxes, and property taxes. And if the residential tenants have left the property in bad shape, revamping the property in order to attract new tenants can be expensive. However, with industrial real estate properties, such as distribution centers, these costs can be much lower. 

Although office vacancies have surged as employers and companies prepare for a post-COVID-19 future of distributed work, the industrial real estate market is hotter than ever. This is due to a pandemic-fueled surge in e-commerce as well as increased consumer demand to receive more products at Amazon-like speeds. See Marcus and Millichap.

4.    Can Be Easier to Liquidate

Due to currently high overall demand for industrial properties, these properties generally remain on the market for shorter periods of time than other real estate asset classes.

5.    Higher Potential Yields

With typically fewer market fluctuations, longer leases, and less turnover, investors are likely to potentially benefit from a greater ROI. Although all investments have associated risks, industrial real estate is often considered more recession-resilient than other types of properties, and these properties tend to hold their value and sometimes possibly appreciate over time. As industrial properties can have higher rental rates, this can also lead to higher yields for investors.

Contact Perch Wealth today to discuss opportunities about investing in industrial properties.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure:

•         There is no guarantee that any strategy will be successful or achieve investment objectives;

•         Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;

•         Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;

•         Potential for foreclosure – All financed real estate investments have potential for foreclosure;

•         Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.

•         Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;

•         Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits.

How Should I Invest My Wealth in 2022?

The present market offers financial backers a plenty of speculation valuable open doors across various ventures. While having different choices can assist with further developing a singular's venture methodology, they can likewise cause vulnerability, bringing up issues about which speculation suits the individual's monetary targets. So you may be wondering where do I invest my wealth in the current economy.

To help give guidance on which investment is ideal for you, we will frame the fundamental components of the present most wanted speculations and go over the upsides and downsides of every one.

For this article, we will isolate the data into two segments. To start with, we will take a gander at more conventional speculation choices, like putting resources into stocks or bonds. Then, we will audit elective speculations. Albeit less known among the present financial backers, elective choices offer potential advantages that numerous customary speculations need.

Customary Investment Options

By and large, financial backers have depended upon a 60/40 portfolio piece to assist them with accomplishing their long-term monetary dreams, for example, fabricating a savings for retirement, reimbursing a home loan early, or paying instructive costs for their youngsters. As indicated by this model, a financial backer's portfolio ought to comprise of about 60% stocks and 40 percent bonds. This model generally would in general convey financial backers stable development and pay to assist them with meeting their monetary objectives.

Stocks, or values, are protections that address partial possession in an enterprise. Financial backers purchase stocks and depend upon the organization's development to expand their abundance after some time. Also, stocks may offer financial backers profits - or installments to investors - for recurring, automated revenue. Then again, bonds are obligation protections presented by a company or government substance hoping to raise capital. Not at all like stocks, bonds don't give financial backers proprietorship freedoms, yet rather they address a credit.

The largest contrast among stocks and securities is the manner by which they produce benefit: stocks should appreciate in esteem and be sold later on the financial exchange, while most bonds pay fixed interest after some time.

While stocks offer financial backers the potential for more significant yields than securities, securities are by and large considered a safer venture. Therefore, numerous financial backers go to venture reserves, like common assets, trade exchanged reserves, or shut end assets, to broaden their portfolios while keeping a 60/40 arrangement. These venture subsidizes arrange capital from various financial backers, which is then, at that point, put into an arrangement of stocks and bonds. Venture subsidizes offer financial backers the possibility to moderate risk through a more adjusted portfolio.

A Change in the Portfolio Model

Because of progressing unpredictability in the stock and security market, rising costs for wares, and high valuations, the customary 60/40 portfolio model is done serving financial backers in a similar way it once did. Therefore, numerous monetary specialists are presently suggesting that financial backers broaden their portfolios with 40% elective ventures to help possibly advance their monetary position.

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Elective Investments

While various kinds of elective ventures exist, we will zero in on elective land speculations because of the advantages they might perhaps offer financial backers in the present market.

Why Invest in land?

Land has for quite some time been one of the most sought-after open doors for financial backers. As a restricted ware, land has generally managed the cost of financial backers the potential for long haul security, fantastic returns, recurring, automated revenue, charge benefits, and a fence against expansion. Notwithstanding, land speculations additionally accompany specific drawbacks. Beginning in land effective money management ordinarily requires a broad measure of capital and solid financials for the individuals who are utilizing obligation.

Besides, land by and large requires dynamic support - financial backers are expected to deal with their resources for guarantee ideal execution. In this manner, elective interests in land have begun filling in prominence among the venture local area. While they can frequently offer comparable benefits to land money management, they convey a uninvolved open door, meaning they have zero administration obligation. The following are a couple choices for financial backers looking for elective land speculations.

Real Estate Investment Trusts

A real estate investment trust (REIT) is an organization that possesses and normally works pay creating land or related resources. REITs consolidate all resource types, including multi-family, retail, senior living, self-capacity, cordiality, understudy lodging, office, and modern industrial properties, to give some examples. Dissimilar to other land ventures, REITs by and large buy or foster land for a drawn out hold.

Financial backers depend on a REIT's comprehension expert might interpret the housing business sector to broaden and balance out their portfolios. Numerous REITs are public, implying that all financial backers, including unaccredited financial backers with restricted capital, can put resources into them.

While public REITs convey many benefits related with customary land effective financial planning - like pay potential, broadening, and conceivable expansion security - they additionally accompany some particular inconveniences. For instance, REITs frequently experience slow development. Since REITs should pay out at least 90% of their benefits in profits, new acquisitions and improvements are restricted. To decide the strength of a venture, potential financial backers ought to lead a reasonable level of investment - with the help of a specialist on the REIT before buying shares.

Delaware Statutory Trusts

A Delaware Statutory Trust (DST) is a lawfully perceived land speculation trust where financial backers buy a possession interest, or partial proprietorship, in a land resource or land portfolio.

DSTs are usually depended upon by 1031 trade purchasers since they qualify as a like-kind property per the Internal Revenue Service (IRS).

As well as giving financial backers recurring, automated revenue potential through an administration free venture, DSTs empower financial backers to put resources into institutional quality resources for which they wouldn't in any case haveaccess. These resources might have the option to convey more significant yields and longer-term strength.

Moreover, the obligation designs of DSTs are appealing to numerous financial backers. Individuals who put resources into DSTs have restricted obligation equivalent to their ventures; nonetheless, they can exploit the frequently alluring funding gotten by the support organizations. Sadly, just licensed financial backers can put resources into DSTs.

Opportunity Zones

Opportunity zones (OZs), characterized by the IRS, are "a financial advancement device that permits individuals to put resources into upset regions in the United States. This incentive’s intention is to prod financial development and work creation in low-pay networks while giving tax breaks to financial backers." OZs were presented. under the Tax Cuts and Jobs Act of 2017, and financial backers keen on putting resources into an OZ should do as such through a qualified opportunity fund (QOF).

QOFs can be an eminent choice for financial backers because of their tax breaks, which rely upon the period of time a financial backer holds a QOF venture. We have recently made sense of these advantages, which we allude to as OZ triple-layer charge motivators. Here is a depiction of the tax cuts a QOF offers a financial backer:

● Deferral: Those who rollover their capital increases into a QOF can concede capital earn respect from the first speculation until December 31, 2026.

● Decrease: how much capital increase perceived from the first speculation is diminished by 10

percent in the wake of accomplishing a five-year holding period, as long as that five-year holding period is accomplished by December 31, 2026.

● Avoidance: Long-term financial backers are qualified to pay no expense on the enthusiasm for their QOF venture upon attitude of that speculation, no matter what the benefit size, assuming the resources held in that QOF are held for no less than 10 years.

While opportunity zones are viewed as an unsafe speculation, provided their motivation, they might possibly convey financial backers better yields when contrasted with other elective land venture choices.

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Interval Funds

An extra elective venture choice worth focusing on are interval funds. These assets are not restricted to land yet rather can be utilized to put resources into numerous protections, including land. Comparable to recently referenced reserves, these arrange investor money to put resources into various protections. Be that as it may, they offer a lower level of liquidity. Rather than having the option to exchange shares everyday, financial backers are normally restricted to selling their portions at expressed spans (i.e., quarterly, semi-every year, or yearly). The advantage of stretch assets is the adaptability they offer the assets - they permit the asset to execute longer-term procedures, making the potential for a more steady venture.

Accordingly, interval funds will generally convey better yields and a more broadened an open door. Presently, where do I put away my cash today? While the above data offers a depiction into the upsides and downsides of different speculation choices, you ought to think about extra perspectives. As opposed to promptly attempting to distinguish which choice is ideal for your purposes, the critical focal point here is to comprehend that the present market offers a variety of venture choices that were already obscure to quite a large number. Financial backers can broaden past stocks and bonds, which might potentially give them more significant yields while trying to relieve risk. To foster a venture portfolio that meets your monetary objectives, we encourage you to talk with one of our monetary experts.

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. Information herein is provided for information purposes only and should not be relied upon to make an investment decision. All investing involves risk of loss of some, or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication.

1031 Risk Disclosure: